There is a remarkable uniformity in the business model of law firms that often no longer serves lawyers’ objectives. The profession clings to the presumption that a successful firm must be an equity partnership in which those elevated to partner status share in the profits and governance of the firm according to some numerical assignation of their relative worth. This is the way law firms do business — always have, always will.
But increasingly, lawyers seem disappointed by this model. Why are the financial rewards not greater for those who seem to be doing very well? Where is the sense of real collaboration among partners? Why do individual lawyers lack recognition commensurate with their accomplishments? Why do lawyers lack the control over their practices and their firm’s resources that they feel they have earned and need? Why are associates not more inspired? Why is there so much bickering among partners over money or even pettier issues? Why do lawyers not feel more gratified professionally and financially? Why are they often envious of their clients — who seem to be so much better rewarded and fulfilled?
The fault may lie less in the usual explanations for lawyer discontent — bad management, quarrelsome partners, unpleasant clients, uninspiring work — but rather in a more fundamental problem. The business model is lousy. Yet it never changes. Lawyers who are unhappy either stay at their firms and tinker with their foibles, or they leave for what they hope are greener pastures, but in the end they still embrace a firm, either their new one or their old one, with this conventional business model, and not much actually improves.
This article suggests a different business model. It may not be suitable for all law firms; it may be particularly suitable for a small or midsize firm. The point is not that this model is the only new approach that can make a difference. The point is that there is more than one way to successfully organize a law firm and that some of the conventional premises are worth re-examining.
These are some of the key differences between this model and standard practice:
� There is only one equity partner. Every other partner is a contract partner who has contracted with the firm, either individually or through a practice group, for a specified compensation. That compensation has two parts: a “guaranteed annual base” (for a two- or three-year period) paid out twice each month, in an amount approximating the partner’s total compensation for the prior year; and a bonus, which consists of a percentage of the gross fees obtained on that partner’s business generation (or the business generation of his or her practice group) in excess of a negotiated benchmark. The business generation consists not only of matters originated and handled by that partner but also matters that the partner refers to a colleague in another department (such as a litigator referring a real estate matter to his real estate partner) or that a colleague in another department refers to him or her.
This arrangement has a number of benefits. First, partners have the security that, at least for a specified time (but not indefinitely), they will continue to earn at least as much as they currently are earning. Secondly, because each partner receives bonus compensation based on the gross fees he or she generates or contributes rather than on a percentage of the firm’s overall profit, the partner’s compensation is not diluted by other subperforming partners or by the decisions of management regarding how much or what expenses to incur, or by the vagaries of an approving or disapproving partner sitting on a compensation committee. Each partner feels fairly compensated for his or her work.
Third, the system strongly encourages cross-selling and collaboration, because the partners’ bonus compensation is based not only on the fees they originate from their own matters but also on the matters that other partners refer to them or that they refer to others. In this way, each partner is financially motivated to build relationships with other partners and to share work and clients, thereby minimizing a problem prevalent at many firms, which is that partners shrug off work requests from other partners because they are not directly rewarded.
ILLUSIONS OF EQUITY
� Partners make no capital contribution; no partner other than the equity partner is responsible for the firm’s expenses and liabilities. At equity firms, equity actually is worth very little. It is certainly not like equity or shares in a business that can be sold or freely transferred. Even when a partner leaves a firm, he or she has nothing to cash out, other than perhaps the money he or she put in, which earns nothing and is often held back for a time or compromised. Why should a partner, therefore, share in liabilities, when that may be all he or she has if the firm dissolves or fails, as happens sometimes to even the most prominent firms?
Under this model, the equity partner keeps all the profits of the firm but also is responsible for its obligations. Inasmuch as the equity partner owns all firm receivables, the receivables can be used by the firm and its equity partner to finance expenses.
� Partners have no votes. This is a system for lawyers who believe democracy is overrated — or at least that it is in business. Partners at equity law firms rarely feel empowered by their theoretical voting rights. Certainly, at most large firms, votes are largely a formality. Governance typically rests with a management committee that accounts very little to any individual partner and often is dominated by members in a home office that is distanced in every real way from the “branch” offices. Partners often are asked to sit on and devote time to committees that ultimately determine very little and take valuable time from their practice. Those who sit on the management committee have even more of their time diverted and, in the end, still typically defer to the preferences of a more dominant partner or, if not, squabble over relatively unimportant matters that lead to divisions in the firm and lots of downtime.
Under this alternative model, all policy decisions ultimately reside with the single equity partner. The success of the system, of course, depends in large part on the faith of the partnership in the fairness and judgment of that partner — but partners may well feel more empowered under this system than under an equity partnership as long as the equity partner is readily accessible. Insofar as a partner wishes the firm to take certain action — such as hiring an associate or taking on a contingency case — that partner meets with the equity partner (and perhaps the department head), and decisions are made in such one-on-one meetings without seeking consensus from all other partners or committees. In this way, things actually get done, not just discussed. It is a model that places high importance on nimble governance, on the ability to make decisions in a timely manner without the exhausting, often combative and ultimately paralyzing process of seeking real consensus from dozens or hundreds of partners who by their very nature are disinclined to agree on anything.
PARTNERSHIP IS POWERFUL
� Partners have more autonomy over their practices. This model is designed for lawyers who believe their clients come to them and stay with them primarily because of what they as individuals do for their clients, not so much for the name of their firm. Certainly, many institutional clients have long-standing relationships with many institutional law firms, and the business is sustained at some of those firms more for historical reasons. But many lawyers serve clients whose allegiance is primarily to them individually; more and more clients hire lawyers, not law firms. These lawyers are often ill-served by conventional law firms, because the firm promotes only its own name and does little, if anything, to promote its individual partners.
This alternative model emphasizes promoting and marketing its lawyers, not just the firm. It is premised on the belief that the best way to obtain and maintain business is to build and enhance the reputations of individual attorneys and give them the marketing support and resources to generate their own name recognition in the legal community. Marketing materials are prepared for each practice group and for each lawyer individually, touting them specifically and their individual accomplishments, alongside the firm name but, typically, more prominently than the firm itself. A practice group may have its own group name such that, for example, the employment practice is branded under the name of one or more of its partners, as the bankruptcy practice is, or the patent practice or any other group that is targeting a particular sector or audience.
In some instances, the firm may form affiliated firms in certain practice areas or in other cities to allow partners with extraordinary recognition in individual fields or in another community to include their names as part of a firm name that still practices as part of the larger firm in every way (and even within the same office) but that capitalizes on the reputation and goodwill of these partners, who are widely recognized as leaders in a particular field or region.
The point is to enhance lawyers rather than diminish them. There are various ways to do this if the business model does not limit itself to branding the firm, as opposed to its members, as most conventional firms do. Under this model, there is a recognition that partners are typically in a better position than the firm itself to make most decisions affecting their practice, including decisions about billing rates and how to handle their matters.
The idea of forming law partnerships certainly was not inspired by any desire on the part of individual lawyers to surrender their identity or their authority to govern their own matters and clients — yet law partnerships have evolved into superstructures that do just that. Professional self-esteem is not sustained simply by having the status of “partner.” It must be cultivated by firms for their attorneys to genuinely feel and project their professional self-worth. At most conventional law firms, promoting professional self-esteem is simply not part of the agenda.
EMBRACING THE UNCONVENTIONAL
� The firm is designed to seize opportunities. Perhaps the most glaring shortcoming of the conventional law firm model is its inability to capitalize on unconventional opportunities. There are many ways to make money in the practice of law other than by living on a clock. Yet conventional equity partnerships are designed to generate revenue only by hourly billing. The conventional model is centered on the basic operating principle of collecting as many fees as possible over a two-week period and distributing as much of that money as possible to each partner every two weeks according to his or her assigned share of the pie. There is little tolerance in the system for deviation lest the partners’ take every two weeks falls short of expectations.
As a result, there is little room to handle matters on anything other than an hourly basis, and therefore few other opportunities are even identified, much less pursued. Indeed, even if the financial dynamic of the conventional law firm model could more readily allow for less conventional fee arrangements, it is almost impossible for most equity partnerships of any size to have its partners or committees agree on which matters to take on, particularly when such opportunities often require timely responses.
The nonequity model is designed to take advantage of such opportunities. The premise is not only to allow for real flexibility in fee situations but to actually invest in the business — the law business. Alternative fee arrangements — including contingency fees, fixed fees, capped fees, blended rates or premium and other success fees — are readily accommodated. Appropriate opportunities to invest with clients or in clients are welcomed. It is not that conventional firms don’t have such opportunities; they are there all the time. But conventional firms are not structured to participate in these opportunities, so typically, they don’t even examine them. Under this alternative model, substantial revenue can be generated in alternative ways. The additions to the bottom line can be dramatic.
Obviously, there are various challenges in this model, not the least of which is the willingness and ability of an equity partner to shoulder the burdens this model imposes on him or her. But there are certainly lawyers who are significant investors in many businesses — just not the law business. Why shouldn’t lawyers invest in their own business? The rewards can be considerable.
Whether or not this particular business model has broad appeal, it is evident that there is broad frustration with the prevailing model, and alternatives need to be entertained. Businesses in other professional and financial sectors have been far more innovative in looking to alternative business models than has the legal profession. Some have even gone public, which itself, ultimately, may be an alternative for the legal profession as well. Certainly, there are some boundaries between a business and a profession, but some of the assumptions about how lawyers maintain those boundaries bear scrutiny.
Marc S. Dreier is the founder and managing partner of Dreier, a 175-attorney firm headquartered in New York, which operates along the lines outlined in this article. He can be contacted at firstname.lastname@example.org.